Shoprite Holdings (JSE: SHP), a prominent South African retailer, has reported strong interim results for 2024, with significant sales growth and market share gains. The company announced sales of ZAR 121 billion ($1 = ZAR 18.83), marking an increase of ZAR 14.8 billion in the last six months.
Shoprite's gross profit margin improved slightly as it managed to absorb inflation costs. The company also reported a 5.1% growth in item volume, translating to ZAR 4 billion in share gains and 58 months of uninterrupted market share gains. Despite a challenging economic environment, Shoprite has outperformed its competitors and achieved record market share gains.
Key Takeaways
- Shoprite's sales reached ZAR 121 billion with ZAR 14.8 billion added in the last six months.
- Gross profit margin increased slightly due to the absorption of inflation costs.
- The company achieved a 5.1% item volume growth, resulting in ZAR 4 billion in share gains.
- Shoprite delivered 454 million personalized offers, leading to ZAR 8.4 billion in savings for customers.
- The non-RSA business segment reported a trading profit of ZAR 434 million, while the franchise division saw double-digit sales growth.
Company Outlook
- Shoprite plans to open an additional 140 corporate stores in the second half of the year.
- The company expects capital expenditure to grow in the second half.
- Shoprite aims to become Africa's largest and most profitable omnichannel retailer.
- The company is focused on defending its position as the number one online grocery platform.
Bearish Highlights
- Total expenses increased by 14.8% to ZAR 24.7 billion, raising sustainability concerns.
- Net finance costs rose by 22.2% mainly due to higher borrowing costs.
- The franchise business faces market competitiveness challenges.
Bullish Highlights
- Shoprite's Rainmaker Marketing and Media operations saw a 24% revenue increase to ZAR 279 million.
- The company's dividend increased by 7.7% to ZAR 2.67.
- Shoprite added 285 stores over the last 12 months, now totaling 2,237 stores.
Misses
- The company recorded a ZAR 244 million loss due to civil unrest.
- Diesel expenditure increased by ZAR 465 million, and insurance costs went up by ZAR 90 million.
Q&A Highlights
- CEO Pieter Engelbrecht expressed confidence in the profitability of Shoprite's Sixty60 delivery service.
- Shoprite has no current need to increase borrowings, remaining at ZAR 6.3 billion.
- The supermarket section of Massmart stores is profitable, while the 10 wholesale stores are not yet profitable but show double-digit growth.
In summary, Shoprite Holdings has demonstrated resilience and growth in a competitive market, with a strategic focus on price competitiveness, market share expansion, and omnichannel retailing. The company has successfully navigated inflationary pressures and civil unrest, translating its operational strengths into increased sales and profitability. With plans for further expansion and investment in digital and supply chain capabilities, Shoprite is positioned to maintain its leading role in the African retail sector.
Full transcript - None (SRHGF) Q2 2024:
Pieter Engelbrecht: Good morning, everybody. Welcome to our Interim Results Presentation for 2024. I hope that we will be able to give you some insights in what had transpired in the last six months. We will use our normal format, where I will give a bit of an overview just for the group. Anton will then take us through the detailed financials, and then I'll just end off again with a bit of the strategy and how we see going forward in the next couple of months. So, in terms of the operational overview, the first part of my presentation, I know I can spend an hour on all the excuses of why things are not great or why the performance could be better or what the reasons are what makes doing business in South Africa extremely challenging. But we're not going to do that. That is not what we do. Rather, we're going to just tell you that, we've been busy again, as usual. We have done a lot of development, additional employment. We've launched some leadership programs. We had some fun in terms of advertising, some creative. We had the World Cup that was quite fun with the old Sixty60. And very happy also to say that we have managed to get 34 new innovation and retail awards in the last six months. But we never lose focus on the fact that we have responsibility to develop small and local suppliers and then keep the affordability in mind. So the example here is a Meal for four for just ZAR 20. The little scooter that, we are proud to say, it's locally made, very happy with that. Continue to develop the Forage & Feast brand, very high levels of acceptance amongst our special Checkers customers. And we even try to put the Xtra joy back into Christmas when we decided to do something special for Stanford after that town suffered terrible flooding. It's been a very busy year. Sales amounted to ZAR 121 billion. Now, one can very easily get carried away with big numbers and also percentages. What is noteworthy here is the fact that, there was ZAR 14.8 billion of additional sales added in the last six months. That is an enormous amount, I think, in any person's book. Gross profit, you would have seen that last year, we had a slight reduction in our gross profit margin. I did explain at the time that, we took a decision not to pass the price increases as fast on to the consumer as they were passed on to us. In other words, we absorb some of the inflation on behalf of the consumer that pretty much have now phased itself out and we're a bit more normalized scenario. Hence, the slight increase in the gross margin. Always great to be able to pay a dividend and even better, if there's an increase in the dividend. So, very pleased with the results this six months. So contrary to common belief, our customer visits growth, it's not purely new stores or space growth. Customers are actually more loyal. They frequent our stores more often and they also spend more with us. This has resulted in an item volume growth of 5.1%, always very good. It's good for our suppliers. They need volume growth in order to stem the increases in costs. That has resulted in a ZAR 4 billion in share gains and is now marking 58 consecutive months of uninterrupted market share gains. We believe we continue to win with our customers, outpacing our competitors. One is our obsession about price, and price competitiveness. And very clearly, on the right-hand side, you can see that throughout the period, our own internal inflation was less than the official food inflation. Supermarkets RSA had a very good performance, growth of 14.6% outgrowing the market by more than twice. So, it's just illustrating that customers do appreciate, what we bring to them. If we exclude Massmart from the sales, it still amounts to 11.2%. Checkers remains the fastest-growing premium grocer format, for now the third year in a row. Sixty60, continue to grow at 63% on a very high base. I will get to the Sixty60, also a little bit later. Liquor had excellent six months, so growing 25%. And just a reminder again, that we do multi-year investments. It's not one source. It's not the lucky break, here or there. It comes, with a very clear defined strategy that we execute on, because we don't do knee-jerk. We continue to invest in low prices to shield our customers. One mustn't forget, with the cost of fuel, the importance of high levels of in-stock. And it's quite telling, if one sees your competitor pickers, pick in your own store for their digital customers, which is testimony of the high levels of in-stock that the group maintains and have maintained over the last three years. And as you can hear, I'm almost overemphasizing, our obsession about price. We are the price champion for customers. Every rand matters. We've told you before, since 2016, we've been selling a ZAR 5 loaf of bread. We've got a ZAR 5 burger. We have these days, ZAR 1 packet of chips, ZAR 1 packet of little chocolate biscuits. I know of no retailer in the world, that sells product at that price. I always say, you can pick up ZAR 1, on the pavement and you can put a smile on a kid's face with ZAR 1. So, as you can see, to be able to deliver on 454 million personalized offers, means that there are proper processes and systems required, in order to be able to reach so many of the Xtra Savings Reward members. The instant savings that those members got at total [ph] point amounted to ZAR 8.4 billion for the six months. For me, incredible staggering amount. And if you put on the other side of that, we're going to spend ZAR 8.5 billion on CapEx, in this year. It just gives us the scale of this operation, and that it means that every single day, team Shoprite has to execute at its premium superior level, every single day to make sure, that customers get the cheapest and most affordable prices. It's very clear, that we execute against the strategy, and that has delivered a record market share for us. Now, actually against the trend, we had exceptional Black Friday promotion. And what's quite telling on the graphs that you currently see, is the acceleration of the market share gains in November and December. And even I was surprised and maybe I shouldn't, but to have gained ZAR 4 billion in market shares, over the last six months, is an incredible achievement. So my hat off to team Shoprite, for once again, just executing and delivering at scale, the best-in-class and best in market. Then just to make sure, especially that for our international audience, that we clarify for you how we see our store and our business portfolio. Each of them are very specifically focused on a very specific customer and therefore, also the ability to address specific customer need states for each of the brands. They don't overlap, which means they are quite clear in terms of which customer they serve, and therefore, so much better in order to execute what customers need in each of those banners. Every year, I get asked, where is the growth going to come from? And then every year, we outgrow the market, and it's been now multi-years of outperform in the market. And we are busy with a lot. So we always try new things. So here is just the example of our adjacencies, more focused at the premium market, our Outdoor, Pet, or Little Me, Medirite, UNIQ. We continue to seek for areas of growth. And so far, we could achieve that every year in the last couple of years. If we look at the Checkers brand, not too long ago, I would say, about three years ago, we set our first target that we would love to achieve would be a 15% market share overall in the former market, and now we have achieved that. So in the last six months, we surpassed the 15% market share. And you can see, I mean, it's got its own very specific need states that we deliver, whether it's personalized, best value, premium private labels. Very clear in its positioning. And then Shoprite on the other hand, I mean, with a whopping over 20% market share, again, very clearly positioned in terms of what does it deliver, absolutely uncompromised on lowest prices, affordable private labels and the width of promotional availability for consumers to stretch their wallets. The other business units, pleased to say that the non-RSA business we have given the guidance before of around ZAR 500 million for a year is trading profit guidance. And happy to report that for the six months, we're sitting at ZAR 434 million. It does give one a sense that we have made hard, but the right decisions around what we call Africa or then the rest of Africa in terms of our disinvestment and also how we've allocated capital into that segment. Furniture, I must took my hat here that, I think we can do better, certainly. And we've got plans. It's almost a little bit of -- we have so much to do. And every time there's a capital allocation in the poor Furniture business to wait a little bit more. So we feel that we can do better there, and we will. We also have put some new credit processes in place for credit sales as we are indexing very low in terms of the industry as far as credit sales are concerned. Very happy about the Franchise division. OK Franchise, achieving very good double-digit sales growth numbers, and so also Transpharm and Medirite. So very happy with that 23% performance from the other operating segments as well. That is just a little bit of the overview that I have done. And I'm now, as usual, I'm going to hand you over to our very fine, Chief Financial Officer, Anton. Anton?
Anton de Bruyn: Thank you very much, Pieter, for that introduction and also giving some insights into the financial performance for the first half. Two aspects that I just want to make the investor community aware of. The first one is we introduced IFRS 17, which deal with insurance contracts, not material for the group, more from a disclosure point of view and you'll see the full notes in the results. Second aspect is that Ghana has been inflationary environment for more than three years or more than 100%, and we've treated Ghana as hyperinflation in the year. As part of IFRS 17, we had to restate the results, which you will see in the detail. Before we go into the detail of the H1 results, I think we must just remind ourselves some of the base effects and also what we saw in the prior year. We came from a base of sales growth of 16.8% with the RSA Supermarkets division reporting a first half trading sales growth of 17.5%. And also the non-RSA segment reported 17.5% sales growth. From other operating income point of view, we had that loss of profit claim relating to the 2021 civil unrest of around ZAR 244 million. That's in the base, which is a once-off. And then from a operating cost point of view, we saw that ZAR 465 million increase in diesel expenditure. That took us up to around ZAR 560 million for the first half. A little did we know that we will spend another ZAR 800 million in the second half to bring us up to around ZAR 1.3 billion of additional diesel expenditure for that year. We also saw increase in insurance costs around ZAR 90 million for that first half, relating to the civil unrest and that PTS government policy that we had to put in place. The full year impact of that was ZAR 180 million. Pieter spoke about that ZAR 1 billion impact that we started off with and those were some -- just another -- some more color around what made up some of those amounts. If we then turn to the financial results. Sales increase of 13.9%. Pieter gave a lot of detail around what was driving that sales growth. Total income increase of 13.9% to ZAR 31.4 billion; total expenses up by 14.8% to ZAR 24.7 billion, and then our trading profit increasing by 10.7% to ZAR 6.7 billion. Each of these items, I will unpack in much more detail as part of the presentation. EBITDA increasing by a very strong 10.3% to ZAR 10.2 billion and compared against our profit after tax growth of 3.8%, we can just see the impact of that 22% or ZAR 327 million increase in finance costs, which I will also unpack later in the presentation. Diluted headline earnings per share increased by a strong 7.6% with earnings per share increasing by 4.6%. ROIC excluding the impact of IFRS 16, increased from 16.2% at the end of last year to 17% in the current year with a WACC rate of 13.7%. Our dividend increased by 7.7% to ZAR 2.67 and very much in line with the diluted headline earnings per share growth. Just a reminder for our investors and international investor community, we currently have a dividend policy or a full year dividend policy of 1.75 times HEPS. And I see, at this stage, no reason why we will not again deliver on that growth. Our return on equity is currently 25.4%. Supermarkets RSA showed a 14.6% sales growth to ZAR97.5 billion with a like-for-like of 6.3%. Excluding the impact of the Massmart stores, which contributed around ZAR2.9 billion of sales, this segment would have seen a growth of around 11.2%. From a Shoprite and Usave point of view, as well as Checkers and Checkers Hyper, Pieter really unpacked that as part of the operational performance. I'm not going to take more time and unpack that further. I think what is noteworthy from a LiquorShop point of view, base growth was 37% and a 25.2% growth was achieved on top of that. We also saw very good growth in store openings where we saw another 104 stores added to the LiquorShop operations. Supermarkets non-RSA increased by 6.2% to ZAR10.6 billion, again a story of affordability as well as currency fluctuations. And unfortunately the first half of the year has been no exception. If we look at the last 12 months, we are going to saw two of our major markets being impacted, negatively impacted. Firstly with Zambia having currency devaluations of around 31% and then Angola having currency devaluations of around 52% during the last 12 months. Our constant currency growth was around 20% and our internal inflation for the segment was 8.8%. Furniture growth of 1.7% to ZAR3.9 billion saw an increase in our credit participation just over 15%. But as Pieter mentioned, there's work for us to be done there. We did, however, see a good growth within our non-RSA segment relating to Furniture. And then other operating segments, Franchise strong growth as well as our Medirite and Transpharm business showing a 18.5% growth. If we just look at store expansion over a 12-month period, we managed to add additional 5% of space, GLA space or gross lettable area space excluding the impact of a Massmart store opening. And if I look at the last six months, we've added 2.2% in space. Saw a nice contribution and growth in all our banners. Within Shoprite we added 75 stores. Yes, 51 was relating to the Massmart transaction and we now sit with 628 Shoprite stores. The Checkers stores we opened an additional 16, of which two were our new Checkers Foods concept stores also getting nice traction within that concept. And then Usave another 24 stores added. Between Shoprite and Usave, we now have more than 1,000 stores. LiquorShop as I mentioned at 105 stores with 42 stores contributing to that sales growth from the Massmart transaction. And then very pleasingly our Petshop business where we've seen a lot of traction coming from there where we currently have 75, and I know Pieter is putting a lot of pressure on the operators to reach that first target of 100 stores. If I look at the other concept stores, we currently have 50, of which we have our UNIQ clothing by Checkers of around 19 stores and then also our Outdoor stores of 15. So a net store count of 285 stores opened during this last 12 months, bringing us to a total of 2,237 stores. We then turn to the more detail around income. We saw our income increase by 13.9% to ZAR31.4 billion, a income margin of 25.9%. And as we've communicated in the past, we're aiming for that 26% income margin. Gross profit strong growth of 14.7% to ZAR28.6 billion and also saw a margin improvement from 23.5% to 23.6%. Pieter spoke about that price investment, that we did in the prior year to obviously ignite growth as well. But we saw also further efficiencies through our supply chain and we saw a saving in the diesel that led to also a positive contribution to gross margin. If we look at our shrinkage and wastage in terms of Global Standards again, first half very strong and good result for us. Other operating income increased by 1.8%, but one must remember the ZAR 244 million form part of that line item. And if we exclude that, you'll see that we had an increase of 15.5%. And I will unpack that in the next slide. Interest revenue, insurance revenue and other operating income was impacted also by IFRS 17, the interest revenue increased by 16.7% to ZAR 385 million. We currently have loans and other receivable book of around ZAR 3 billion. We saw nice traction within our CredX business which we supply funding and short-term funding to some of our suppliers where we saw a growth to around ZAR 1 billion at the end of the first half We also have our various funding structures in place in terms of our Resilient Business and then also, of course, our Furniture book, where we also have funding which gave rise to the interest revenue. Our profit from our equity investments, the two that we referred today is our Retail Logistics Fund that we have with Equites that house all our distribution centers currently. The profit growth there was in line with last year. We've introduced further debt structures into that shareholding to basically fund the expansion that I will deal with later. And then, Pingo we saw an increase of profitability to around ZAR 24 million which serve as our last-mile in terms of our Sixty60 business unit. Insurance revenue increased by 24.8% to ZAR 141 million. And then, the net monetary gain was a result of our Ghana Hyperinflation impact. I said, I'll spend a little bit more time on obviously what we deem to as other operating income. Commissions received mainly from our FINTECH business units as well as our OK Furniture business unit increased by 8.6% to ZAR 606 million, in a very highly competitive market currently. In the strategy piece, Pieter will talk about our POS replacement. But obviously, the growth was negatively impacted by that POS implementation that we're busy with, as we could not develop new value-added services products. And I do expect for us to see a more positive growth again in the first half of 2025 financial year. Sundry income, although, it looks like it's down that was where the ZAR 244 million was accounted for. If we exclude that, we actually saw an increase of 21% and it was mainly driven by a strong performance in the recycling income that we increased, but we also launched our Xtra Savings subscription model, during September. And we also launched our Rex Supply insights platform, during the first half that gave rise to the growth in line item. Then delivery recoveries from our Furniture and also Sixty60 business, we saw a 32.5% increase to ZAR 379 million. The growth in delivery coverage is mainly as a result of our increase in our Sixty60 business where we saw a 63% increase. You will ask but why, what's the difference? And why is the growth lagging in terms of recoveries? But you will remember that, some of those recoveries are now part of that subscription that we see in Sundry income. So in the future, it's something that we need to look together to, to try and see the impact of our Sixty60 operations from other operating income point of view. Our Rainmaker Marketing and Media operations, strong growth, really also as part of a start-up. We've seen a really good growth within that business unit of 24% to ZAR279 million. And then we have sold off certain of our properties during the last few years and that's why we've also seen a decrease in our lease income to ZAR232 million. Spoke about the positive Franchise growth and that's why we also see a 9.5% increase in our Franchise fees received. If we then turn to total expenses we saw a growth of 14.8% to ZAR24.7 billion. And from an investor's point of view one should ask the question how sustainable is it if we grow expenses at 14.8% vis-à-vis our income of 13.9% to achieve our profitability growth? And there are mainly two reasons. The one reason is short-term of nature and that is a result of the introduction of our Massmart business unit. The effective date of that transaction was 9th of January of 2023 and then hence it's not in the base. And the second reason is more structural of nature where we see a fundamental change in the business. Pieter does unpack that in much more detail as part of the strategic piece where we look at our monetization of data our insights. And many of these line items appearing on this list is growing at a faster pace than our sales growth which I will share in more detail as I go through the line items. So, if I then turn to depreciation and amortization we saw an increase of 16.9% to ZAR3.5 billion still within that target range that we set ourselves of a depreciation to sales ratio of 3% that's currently sitting at 2.9%. We've -- our depreciation on our PPE increased by 15.7% and our depreciation on our right-of-use assets increased by 15%. We also saw an increase in our depreciation relating to some of our intangible assets, which are all our software developments. And there we can see that the reciprocal income relating to that expense forms part of other operating income in the forms of Rex, in the form of our subscription model in terms of Sixty60. So, the expense in other operating expenses but the income in -- showing as part of other operating income and not a reciprocal sales number. Employee benefits growing at 14.2%. If we exclude the impact of Massmart the growth was around 12.4%. During the period, the group added and created 2,600 new job opportunities. That is on top of the 4,480 Massmart staff that formed part of the transaction. We were very proud again to be able to make a distribution to the Employee Trust of ZAR122 million during the first six months and we also contributed ZAR46 million to the Youth Employment Incentive or scheme, that's driven by government. Electricity and water increased by 14.5% on the back of a NERSA increase, which is the national regulator in South Africa of 18.6%. Again if we exclude the impact of the Massmart transaction we're looking at a growth of around 10.9% for the business. We currently generate around 5.5% of our power usage through renewable energies. Insurance again linked to that IFRS 17 disclosures. And then if I look at other operating expenses increased by 14.6% to ZAR9 billion, some of the major items contributing to that increase was advertising expenditure increasing by 16.4% to ZAR 2.2 billion. Part of two percentage points of that increase was driven by our Rainmaker Media business. We will also do advertising on behalf of some of our customers. Our security costs increased by 15.8% and still at around 1% of revenue. Maintenance expenditure on the back of diesel generator and food fresh increased by 14.2%. And in insurance costs as I mentioned in the beginning we saw elevated costs coming from last year. We did have a slight decline during this half of the year, but still very much elevated in terms of our spend in the past. The expense margin is currently sitting at 20%. If we exclude the impact of the additional diesel costs that were sitting around ZAR 500 million for the first six months, we will get to an expense margin of 20% which we're obviously driving as part of the strategy. If we then turn to trading profit very good growth at 10.7% to ZAR 6.6 billion, excluding the impact of the diesel we're sitting around at 5.9% very close to that target 6% ratio. Supermarkets RSA increased 8.8% to ZAR 5.8 billion and our trading margin within that segment is currently at 6%. Supermarkets non-RSA increased by 37.3% to ZAR 434 million and that was really driven by an improved performance from, especially, our Angolan operation. Furniture, we spoke about that muted sales growth within that sector and also about the 1.7% growth that had a negative impact on also our profitability. And then if I look at other operating segments that growth of 18% on the back of Computicket delivering strong performance our Medirite and Transpharm business where we saw that 18.5% growth and then Franchise also contributing meaningful. Net finance costs we saw a 22.2% increase or ZAR 327 million in the first half. That was mainly driven through our increase in borrowing cost of nearly ZAR 100 million with no increase in our borrowings and then also an 18.2% increase in our IFRS 16 lease liability and finance costs relating to that lease liability. On the right-hand side, we have prepared the illustration of the interest rates and the rapid rate at which the interest rates increase. And from there you can see that from 2021 we saw an increase of around 475 basis points in the prime rate upto 2024 and we saw quite a big move from 2022 to 2023, which is impacting the results now. The full extent of the finance cost we also saw in our second half results of 2023. And that's why I do expect us to see a more normalized finance cost within the second half. We then turn to the balance sheet. From a borrowings point of view we remained in line with last year at ZAR 6.3 billion. Our borrowings to equity ratio improved from 24.5% last year this time to 23.8%. And at year end we were sitting at 24.2%. So we've seen that constant improvement in that ratio. Our US dollar borrowings remained flat as well at $28 million and now represents 8.2% of total borrowings. Another positive move in terms of how we look at working capital. And you will recall that we saw that same move during December of last year. That will rectify itself in June because of the various cutoffs in terms of our trade payables where you saw that ZAR 8.3 billion benefit. And then again our strong cash flows that generated a net cash position for the group of ZAR 8.3 billion. If we turn to capital spend and Pieter spoke about the capital spend increased by 10.9% to ZAR 3.7 billion. And at the end of December, we also had additional capital commitments of ZAR 2.3 billion. If we look at the spend as a percentage of sales, excluding the additional refurb work on the Massmart stores and the investment in our supply chain, the percentage comes down to around 2.7% with our target percentage at about 3% like we give guidance every year. The Massmart stores we spent already ZAR 203 million of the ZAR 552 million initially communicated. And from a supply chain point of view we already spent ZAR 239 million in terms of the ZAR 1 billion, we communicated as part of our guidance. The group prioritizes the expansion in the business, and hence another 71% of our capital allocated to expanding the business. Sales growth, which is driven by the opening of our new stores as well as our refurbishment program. We spent around ZAR 2.3 billion during the first half. Pieter spoke about the AI capabilities within pricing modeling. In there, we spent ZAR 178 million. And then we've also spent ZAR 204 million in terms of expanding our capabilities within our point-of-sale where we're developing an omni-channel solution as well as the launch of the Rex platform I spoke about previously and in the Sixty60 subscription model. We also focus on maintaining our stores and the quality within our stores and there we spent another ZAR 904 million during the year. What is also important to note is that if we look at capital already invested for where we will only realize the benefits in the second half and beyond, we spent around 31% of capital on that. As mentioned previously, we're on a massive drive to expand our supply chain and I gave this update last year and this is basically just a recap of where we are. So in terms of delivery of the Canelands distribution center it's done it's in place and we already had an increase of inventory of around ZAR 300 million within that site. Centurion site is also more or less done and we're taking care of that in March. And then if I turn to what will happen during May, this year already as well is our Riverfields DC is on track. We will start taking in inventory this year, but we will only start operating from that site from July onwards. And in our Wells Estate in the Eastern Cape, where we're adding 8,500 squares is also on track. So we will again start taking in inventory around October, November and we'll start operations from January 2025. We spoke a lot about inventory in the past, and again, with the investment in supply chain I think it's important to realize what was driving the increase of 15.4% to the ZAR 29.5 billion. Again, what was satisfactory is that we could achieve that inventory to sales ratio of 12.7%. Supermarkets RSA was the main contributor on why we saw this increase of 15.4%. So if I purely look at the inventory as a percentage of sales that we see going through the stores, we will see that we saw an improvement from 8.8% to 8.6%. So some of the reasons why we saw that increase in inventory. First, I spoke about the investment in our supply chain where we saw that ZAR 300 million coming through in Canelands. Then we added close to ZAR 700 million just relating to the Massmart transaction and also the other store openings that we saw during the year. Service levels from our suppliers point of view haven't improved, which meant that we also had to increase our safety stock levels. And then lastly, if I look at the store expansion where we're going to open an additional 140 corporate stores in the second half of the year also meant that we had to invest in current supply chain capabilities now. The group is continuing on delivering strong cash flows and this half was no exception. From an EBITDA point of view, again ZAR 10.2 billion. And from a free cash flow point of view, we generated ZAR 9 billion. If you look at our free cash flow conversion ratio, it's very close to that 89%. And if I look at our operating cash conversion, it's sitting at 122%. From a net movement in free cash flow, we generated ZAR 2.5 billion and that currently supports our investment in our store footprint and expansion within our footprint as well as our expansion within our supply chain. If I then purely concentrate on some of the considerations that we expect in the second half, as mentioned, Massmart was only effective from the second half of last year, so we're now hitting that base. And then, we've also looked at our -- if we look at our internal food inflation, we're currently sitting at 6.3% at the end of January vis-à-vis the 7.7% that we were at the end of December. From an operating margin point of view, I mentioned earlier as well that we had a ZAR 800 million spend in the second half of the prior financial year that we're now up against and that's in the base. And then the insurance claim money was a once-off. So that ZAR 244 million that will be the extent for the full year. From an effective tax rate point of view, I still believe that we will be between at 30% to 31%. Our effective tax rate for this half again was 30.8%. From a capital allocation point of view, we spoke about the dividend and the dividend policy, and I do not see any changes at this stage. And in terms of prioritization of capital, although we have a mandate in place to be able to do share buybacks, we are currently prioritizing our store footprint growth as well as investment in our supply chain. From a capital point of view, we guided last year to that ZAR 8.5 billion spend. We are currently on track with the additional and far more stores opening in the second half as well as the Riverfields DC coming on stream and already capital spent in terms of the Wells Estate DC. I do expect us to see a capital expenditure growth within the second half of the financial year. And then from a non-RSA point of view, Pieter mentioned that ZAR 384 million foreign exchange gain in the prior year, linked to those US dollar government linked bonds. Many of those government bonds are maturing during the second half and there is no certainty that we will be able to invest in the US dollar-linked government bonds again, which currently exposes us to foreign exchange movements. We currently have around ZAR 1 billion of cash within the Angolan operations. Volatility, we spoke about affordability and again currency volatility. It's been -- again, in the first half of the financial year, we saw further devaluations in Zambia. At least Angola, we only saw a 2.3% currency devaluation during the last six months. Some good news is that we were able to repatriate the majority of our funds that were in Nigeria, around $13.2 million. That is confirmed and the money is currently within our operations in Shoprite International. So that was a very positive move for us. If I look at new stores, spoke about the 140 corporate stores, of which 81 stores relates to our Supermarkets RSA operations. And then from an inventory point of view, although we know that we are going to do that stock build, we must realize that the Massmart sales were only in for six months. So we will get a benefit. If we look at our inventory to sales ratio, we should equalize the impact of the additional stock within our supply chain. Pieter, that then concludes the financial part of the presentation and looking forward to your piece around strategy. Thank you very much.
Pieter Engelbrecht: Thank you, very much Anton for that very detailed analysis of the numbers. I also hope that you got a clear view of how we think about our capital allocation. There's an important thing these days, especially if we look what the current cost of financing is et cetera. Very important for us to be very clear on what we expect the balance sheet to look like. So you're very familiar with our nine strategic drivers. Very little of it has changed over the last couple of years. I'm not going to run through all of them. But just to once again tell you that, we don't do knee-jerk. We don't chop and change. I think that's part of the success of the company is that we have a plan. We have a very clear plan and then we execute as best as we possibly can. And we believe that is what gives our customers most of what they require from us. It's a multi-year investment. We haven't done small little incremental investments here. We've done large investments over a long period of time. And what we're trying to achieve and this is what I'm trying to illustrate here it's not an end state picture. Don't see it as that. What I'm trying to illustrate to you here is that we make investments where the IP is our own sits with our own teams. It's a multi-tier investment that addresses a lot of customer touch points. So if I just point out one or two. So it's the personalization. The Rex platform that's now in-house, where you may remember we had a very good relationship with dunnhumby. We've now taken all of that customer data in-house. It's also the advanced analytics that we do and we've just completed the price optimization to – that uses artificial intelligence to determine the right and most ideal price point for consumers also for different profiles. And I just want to say that this is not where we're going to stop. It's not the end state. But it just gives you an illustration of what we are busy with in terms of building out the landscape of the retail of the future. Sixty60, you are all very familiar with. But it's not just a cool app for a retailer kind of thing. So we decided that we'll do you – or show you a short clip of just what sits a little bit behind the whole Sixty60. I don't think everybody is actually aware that it's not only limited to our app and then there arrives a little back at your front door. [Video Presentation] Everybody thought that after COVID that this on-demand one-hour service, the grocery lover is going to fall off a cliff, didn't happen at all. As you can see, on the graph, it's just gone from staying to strength. It is the number one grocery app with over 4.5 million downloads. Very pleasing numbers, that we almost created 10,000 new job opportunities. And since inception, the sales increase is more than ten-fold. So, we haven't seen the end of this, yet. I don't think, we will ever go back. This is here to stay. And we have more developments to come. We also like, I just said earlier, we're not at the end state here, and we will keep you informed as we progress. Most of you have seen, the attention around the World Cup, and then all the creative media and I must say, real creative things that was done. And for me the Sixty60, is my best example, of true brand lover -- customer brand love. When customers are dressing themselves in the Sixty60, out for -- to go watch the Sevens Rugby, you know there's a brand love. And that is probably, the dream of any brand builder, So what is it, that Shoprite does? So, Shoprite is building Africa's largest, most profitable -- I want to emphasize it, most profitable omnichannel retailer. We have to defend our position, as the number one, online grocery platform. Of course, everybody is playing in that space. That's why we have to continue to keep on investing on it. Personalization at scale. Of course, that's what I mentioned earlier. If we're competing of what is the most relevant and the most seek after price point those are not things a human can do across such a large organization, so many customers. And that's why we have to build these advanced analytics that we brought in-house and that we have to invest and get better and get bigger in terms of our artificial intelligence led pricing and promotional engines, which we will continue to do. So I've mentioned the Rex platform that we've now brought in-house from dunnhumby. As a matter of fact we actually now have more customers on this platform than what we used to have on the dunnhumby platform, very pleased about that. Our suppliers are very happy with us still. It's easy to use and gives you real-time information. Rainmaker, the media business that we set up basically a bit more than two years ago also profitable, definitely delivering a niche in that market in the retail space. And then, of course, the development on the financial services is taking more traction, more and more as people are looking to save some fees on banking and insurance and also then a little bit of credit. And here's a few examples of categories where we under-index our average market share. So there lies a good growth for us even internally in the grocery business just to get those categories up to where our average market share is for the group. The private labels, there's always questions around private labels. It's a necessity these days. We're deteriorating supplier service levels. We will have to invest more on that but it's a bit of a chicken and egg because currently there is very little capital investment and capacity, manufacturing capacity in South Africa from all manufacturers. Very few are currently comfortable to invest large amounts of capital into the African space. So you will see that for the year, basically our participation is largely flat and that's mainly because of some issues where around the ports and some products that we've been sourcing for years where there's now all issues around. It's short-term. So we will continue to develop more of these brands. What is, noteworthy, is that I think about three years ago, we said we had 23 of our own brands that was worth ZAR100 million in sales in a year. Now we say to you there are 25 of our own brands that exceeds ZAR100 million in six months. Just show how these brands have become more of a national brand than what it is just more of the same. We don't do more of the same. We like to complement the category whether it's a price point or a quality position. And we continue with our strong partnerships. Very good to say that OK Foods, OK Franchise division now over 600 stores also gained market share, I mentioned double-digit sales growth and also very clear in terms of the positioning in what market segments are. And then pleasing for us you might have heard this already is that later in the year, we will then start with our -- execution on our HealthyFood partnership with Discovery (NASDAQ:WBD) Vitality. Also from Anton's part of the presentation, you would have noticed that we are spending quite a large amount of CapEx in the expansion of our supply chain. I don't know if any FMCG supplier in the world have got 80% inbound service level and a 99% outbound service level. And that is what has allowed us to fulfill so much better on our customer promise of the in-stocks and hence why we have been able to increase their loyalty and they shop more from us and they frequent us more frequently. And then we're still expanding. We're not stopping, whether it's expansion in systems and the personalization and artificial intelligence. It's also the physical stores. We have planned 250 new stores for the year. There's still 140 to go for the remainder of the year to June. Maybe I can also mention that, we've just started the implementation and the rollout of our new state-of-the-art point of sale system. And if I may, the CEO of the company who provides that software said that, it's by far the fastest rollout of such and -- at scale of such a system that he's seen in his 20 years of experience in the industry. And then there's the force for good. Force for good for us is not just a tick box. We've been doing these things for years and at scale, our mills, our sub kitchens. We understand that the role that we play in this African economy, especially that we are the providers of food, our communities need us. There are a lot of needy people in our communities. And I do believe as a responsible corporate citizen, Shoprite does deliver to its communities. Force for good also of course includes the planet. We cannot ignore the planet. It's a large organization like us. We have a direct responsibility to do best for the planet as well. I'm very proud to say that, of our installed packaging used currently, 99.4% of it is now reusable or recyclable or compostable, which I'm very proud of. And then, although this was a consequence, not the aim of us doing good for planet is that, Shoprite as a group now has the highest CDP climate change and water security disclosure score of A minus which we are also proud of. And then you're also familiar with this. We've been showing this probably the best of five or six years now, that everything that we do hangs around the core retail business, that red dot there in the middle. I really want you to take note of this and understand this picture, because this is what we do. If we started to live advanced analytics and insights, and then the products that delivers on that digital commerce and then the products that delivers on that. And so, we can go through that flywheel. So, if anything then -- if you really want to understand what it is that Shoprite does and what we deliver, it all hangs off the core business and then we try and enhance everything around this to make sure that we grow our share of wallet from our consumers. So this then concludes our presentation or formal presentation. I hope you've found it insightful and it does clarify some of your questions, and also what it is that we do and try to do every day. So, when we now transition to the question and answer's which Anton, and I will do our best to answer, I will just give you a little bit of update on the short-term outlook the way we see it. Thank you. Anton, so while we just waiting for a few more questions, might as well, made me a little some. So I joined Shoprite in 1997. And in those days it took 19 years to do ZAR 10 billion in revenue. Today, we do ZAR 10 billion in revenue every 15 days.
Anton de Bruyn: Great number.
Pieter Engelbrecht: Just in a -- that's what happened in 27 years in the Shoprite business. So we were talking about scale. So that just gives you an illustration of that. So just very quickly, before we take the questions the sales for the first two months, basically, we achieved low double-digits. Still ahead of the market once again, almost consistently now for five years. The second half will be impacted with much lower inflation. We saw January come down to 6.3% and now February actually has come out at 5.3%. I must say, I have a feeling that we will not be able to keep the inflation at that lower level. We are already talking about ZAR 25 a liter now going for fuel. Now, we all know immediately what that means. So it's good for the consumer. But I think, it's actually nullified by the very high interest rates at the moment. And we're up against a very high base. I have to highlight that you have mentioned that. But I mean, the comparable period last year, we grew at over 18%. And in context with that, I mean, we come off a high of inflation of almost 12% a year ago. So, and now we're talking about 5.3%. So, one just has to bear that in mind, when we talk about low double-digit sales just remember that, it's a much lower inflation number that's also in there. Massmart is also in the base, which is new which we mustn't forget about. Then the investment that goes into the DCs currently is necessitated. We just cannot operate -- if I can just mention one, I mean, I -- in the week went through the December non-deliveries in the direct divisions that we have i.e. where we don't have our own distribution center that, the major supply short supply, was in the region of between 40% and 50%. Now, you're going to say to me that can't be. But it is. Factually, it is true that, we in many instances got delivered less than 50% of what our actual requirement was. Very difficult to deliver on over 98% in stock consistently to your consumer. And also, remember now with the impact that that has on your on-demand digital service, where you have in-stock promise and how difficult that is then to achieve. And yeah, well, you've mentioned the numbers still 140 stores to go new ones to open. And okay it is all across all the formats, so it's not 140 supermarkets. So let's just be clear on that. It's across all the new formats that we also have. And yeah, we're still optimistic. We keep on investing like we always do through all the cycles. And yeah, so Anton this is a summary of a few thoughts.
A - Anton de Bruyn: Yeah. I think basically from your last comment Chris Gilmore [ph] ask and I think you mentioned as well in your presentation is everybody always wants to ask and where is the growth going to come from. I think that's before you basically saw your whole piece around our strategy. But maybe just one or two highlights that you think the growth for us especially for second half and then in the future.
Pieter Engelbrecht: So there's no silver bullet here that we see on the horizon that maybe there's just a another country we can go and add a big piece to the business. We will continue to grow the business organically. Hence, why I've explained how many areas of growth there is in the business in the areas that we are investing in that gives us alternate sources of revenue. And we will expand on the more on the digital and the phrase remains that the growth is going to come by creating the biggest, most profitable omni-channel retailer in Africa.
Anton de Bruyn: Thank you for that Pieter. There was a question from Kristen around what is the liquor shop growth excluding the impact of the Massmart stores and that is 17.4%? Pieter, there's a quite a few questions around obviously you touched on the growth that we saw within Sixty60, the integral part of our business now. So there's a few questions around how do you feel about amazon coming in? What do you see the growth within Sixty60? What -- is Sixty60 profitable? So maybe just touch on a few of those points. And also maybe I see they also talk about marketplace, so maybe try and capsulate all of that in one answer?
Pieter Engelbrecht: Okay. Yes. Most important is yes, it is very profitable, very profitable. I don't I know there are people that don't believe it, but believe me it is. About amazon, everybody knows they are formidable competitors. They've got fantastic systems. They've got marketplace as you've mentioned. But very similar to what I mean we're not unknown to that. It is just another competitor. They stake a lot also. And there are multiple retailers in South Africa. It’s a retail and food retail in particular or FMCG in South Africa is very competitive. It's a hard-fought market. There's not a single competitor that you can focus on. We are all competing very fiercely. In terms of further development, yes, we consistently will continue to develop Sixty60. We're currently busy rewriting the platform. And I did mention that as we get closer to some of the new developments to be released and go live, we will tell the market. Because what we mustn't forget the difference between us and maybe somebody like both Takealot and Amazon (NASDAQ:AMZN) is that we have this very large footprint of stores that we use as micro fulfillment centers opposed to a very expensive single dark distribution center, which is -- it's a completely different model. And also therefore, I think, why I can with conviction tell you that Sixty60 is very profitable.
Anton de Bruyn: Thanks, Pieter. I think that was quite detailed. Have you seen a change in consumer spending habits in the last 12 to 18 months, especially, obviously, after we've seen that rapid inflation increases coming through from a very low base in the prior year?
Pieter Engelbrecht: Yes, two things stand out. One is there are less items in the basket, and that shows you people are under pressure. And then also the increase of the buy into private labels. So that's why I mentioned that our -- a lot of our private labels have become actual national brands in terms of the level of acceptance. So, those two stand out quite prominently.
Anton de Bruyn: Then we have a question here from Damon [ph] around franchisees. So, we obviously saw solid growth within our franchise business. And if we look at our new store openings, we also see positive growth for the second half in Franchise. So the question is just how -- what do you think around Franchise? And obviously where is this growth coming from?
Pieter Engelbrecht: Okay. So Franchise as a concept in totality in South African food retail is becoming more and more challenging, because of how competitive the market is and how efficient the operators in the market is not excluding Shoprite. And so it becomes a tussle between the ability for the franchisee to actually make a profit -- a decent profit and a return on its investment and the corporate or the franchisor. That's why we had, at the time, we took the conscious decision to have the most affordable franchise model in the country to allow our franchisees a good probability to also make a return. But it's becoming more and more increase, more difficult the more efficient the corporate retailers are.
Anton de Bruyn: For sure. I'll take one or two. There was a question just around, when did we move the associated profits from our distribution centers as part of trading profit? So that was already done in December 2022. We did have a disclosure note around it and why we did it. Obviously, it forms part of our integral part of our business and operations. And when that happens you do include it as part of your trading profit. So, for Nick, I hope that answers your question. Now I just get my bearings here. I think Pieter, while, I'm reading through some of these questions, we've landed quite a lot of projects in the first half again, if I look at the project delivery in our second half, especially with the further developments. There's just a question from Ya'eesh. I think there's some concerns around the -- any -- do you foresee any disruptions? I mean, obviously, there's a lot of processes we put in place, but maybe you just want to share a bit more around that?
Pieter Engelbrecht: Yeah. No, Anton. As I said, I mean, we're busy. And we've been busy for a long time now. So I don't think there is a question of, we biting off more than we can chew. You know the amount of planning that …
Anton de Bruyn: Yeah.
Pieter Engelbrecht: …goes into us, before we really decide to allocate capital and embark on a project. We can only do so much. And that's why I used Furniture, as an example. So many times we said we can't do that also this year. So a lot of planning goes into to make sure that we don't over commit.
Anton de Bruyn: Great. We've also talked about the sales growth that we've seen within Medirite and Transpharm, and we've launched the Medirite Plus brand. So what is the traction that you're currently seeing around that? And how do you see the growth? And I think maybe there's some other questions around also UNIQ stores and Outdoor stores. So I think maybe try and handle and treat all of that where do you see the growth within those segments?
Pieter Engelbrecht: Okay. So all of those adjacencies is a long-term play. And we're doing that for the future. You and I may not even be here when that really makes a meaningful contribution. But remember any new business that you start in the beginning what is hard especially if you're fast growing is you -- it is working capital hungry.
Anton de Bruyn: Yeah.
Pieter Engelbrecht: So one needs to get to, that pivotal point of critical mass where after the profitability then really kicks in. So I always say, it's a very simple mathematics to say that if you are opening more stores than, what's in your base, you're always going to run out of working capital.
Anton de Bruyn: Yeah.
Pieter Engelbrecht: So it's only when you tip that point that it really becomes meaningful and we're working on that. So some of these formats are already profitable, some are not. The acceptance specifically around Medirite Plus and why -- it's a word -- it's my own word that I made up. I said that people have premiumized the health and well-being, wellness promise is the word. So, people do enjoy shopping for those products at a specialized outlet.
Anton de Bruyn: Yeah.
Pieter Engelbrecht: And currently there are two players in the country really. So we do see that there's opportunity. We are already in that category. We have transformed the wholesaler. So it wasn't that difficult for us to do. We have got 140 pharmacy licenses. So, so far the stores are looking very promising. And yes, we will continue...
Anton de Bruyn: Thank you very much. There were also a few questions around cost growth. So maybe I can just reiterate, what I said in my outlook statement in terms of why we saw that elevated cost growth in the first half. Majority of that related to the Massmart introductions of the stores that we didn't have in the first half. And I do expect us to see a more normalized expense growth in the second half. And also obviously, the reduced inflation should help us as well. That will be in our benefit. So I think from that point of view. And then Warren you asked about profitability growth. Now, if we can achieve our 26% income ratio, where we're currently very close to and we see our expense ratio to sales of around 20%. And that is really for us the target that we're driving to achieve that trading profit margin of 6%. So if we get the sales growth and we can maintain our 6% growth then we will see a positive growth as well in trading margin. And the 10.7% I think was a very good growth for us that we could actually see there. Things that we have to take into account obviously, is the strong growth or the growth in our lease cost. There was also a question of why was there a 22% or 18% increase in our leases. That is on the back of the distribution centers that now form part of our right-of-use assets and part of that retail logistics structure. But we must remember we share 50% in the profits as well of that structure. So I think that's why we're currently getting a good return out of the transaction we did there. Pieter maybe one question that I've got for you is in terms of price investment. So I spoke about it in terms of what we had to do. Obviously, the first half of last year you've spoken about price investment as well. What do you feel or what do you see as a strategy going forward and the necessity for price investment?
Pieter Engelbrecht: Absolutely. I mean we are unapologetic when it comes to pricing. Shoprite doesn't get beaten on price. And I did say it's a very competitive market. There's nobody else that have – in the last six months in the South African context, they've invested ZAR8.5 billion price at till point. So we will continue giving customers the best value offering. That is part of who we are. That is what we do is, every day we think of how we can reduce the pricing, what development we can do to make products more affordable, to help people basically survive. You know that there are basically 10 million people in this country, that gets -- who have the level of ZAR 350, a month. That's why, we have products like ZAR 5 and we sell over 1.5 million ZAR 5 meals, a week. That just shows you, how big the need is in that space. And that's, how we think. So, that will continue to be what we do.
Anton de Bruyn: Top priority. Yes. There was also one or two questions around borrowings. And do we see -- with the expansion program, will we see increase in our borrowings or do we need to restructure some of our capital structures? At this stage, there's no need for us. You will see from the presentation, I did our borrowings level stayed the same as last year, at that ZAR 6.3 billion level. We've also managed to also increase our loans and loans receivable. So, if you go and look there, you'll see it's about ZAR 3 billion. So I mentioned close to ZAR 1 billion that we've also invested in our CredX business, through loans. So yes, at this stage, I do not see -- I don't foresee any need to increase our facilities at this stage. Pieter, I think that's more or less it. I think the last question, I maybe going to ask you.
Pieter Engelbrecht: Massmart.
Anton de Bruyn: Yes. The profitability? And how do you see, the Massmart stores performing?
Pieter Engelbrecht: Okay. So the Supermarket part of the business is performing well, and is profitable. The 10 wholesale stores is new for us. So, they're not profitable, yet. We're making great progress every week, as a double-digit growth in it. So, we'll get there, but that's where we are now. The meat plant where -- I know there were big losses made in that meat plant. And at the time, I said to you, I am excited and nervous about it. I think, I've now lost the nervousness and I'm now excited about it, because I -- so far it looks like, we'll turn that one to profitability by June. Virtually, every week, the capacity in that plant doubles. So, we are very close to hitting that sweet spot of the volume requirement, to make that a profitable operation.
Anton de Bruyn: I think you still have quite a lot of media, to do later today. So I think maybe, one last closing comment, before we close?
Pieter Engelbrecht: Yes. Well, I can just say thank you to team Shoprite as usual, best executors in the world in my view and -- because these kind of results, with all of these training conditions, that we're in to consistently achieve this I think yes, I can take my fantastic team and I'm very proud to work with. So, thank you.
Anton de Bruyn: Thank you very much.
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